<PAGE>


================================================================================


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                            -------------------------

                                    FORM 10-Q

|X|  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the quarterly period ended June 30, 2001 OR

| |  Transition Report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
                              ---------------------
             (Exact name of registrant as specified in its charter)

      Delaware                                       11-1817252
      --------                                       ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

650 Townsend Street, Suite 225, San Francisco, California           94103
---------------------------------------------------------           -----
   (Address of principal executive offices)                       (Zip Code)

       Registrant's telephone number, including area code: (415) 365-2500
                                                           --------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

             Class                                 Outstanding at July 31, 2001
             -----                                 ----------------------------
  Common stock, $0.01 par value                              25,171,275


================================================================================




<PAGE>



                     SoftNet Systems, Inc. and Subsidiaries
                                      Index

<TABLE>
<CAPTION>
                                                                                                                    Page
                                                                                                                    ----

PART I - FINANCIAL INFORMATION

<S>  <C>                                                                                                           <C>
Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of June 30, 2001 and September 30, 2000 ..........................  2

         Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2001
           and 2000 ................................................................................................  3

         Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2001 and 2000 ..........  4

         Notes to Condensed Consolidated Financial Statements ......................................................  5

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 12

Item 3   Quantitative and Qualitative Disclosures About Market Risk ................................................ 19

PART II- OTHER INFORMATION

Item 1   Legal Proceedings ......................................................................................... 20

Item 2   Changes in Securities ..................................................................................... 20

Item 3   Defaults Upon Senior Securities ........................................................................... 20

Item 4   Submission of Matters to a Vote of Security Holders ....................................................... 20

Item 5   Other Information ......................................................................................... 21

Item 6   Exhibits and Reports on Form 8-K .......................................................................... 29

</TABLE>


                                     - 1 -

<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

                     SoftNet Systems, Inc. and Subsidiaries
                      Condensed Consolidated Balance Sheets
                        (In thousands, except share data)
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                       June 30,  September 30,
                                                                                        2001          2000
                                                                                        ----          ----
                                       ASSETS

Current assets:
<S>                                                                                 <C>          <C>
   Cash and cash equivalents .....................................................   $  11,999    $  44,731
   Short-term investments, available for sale ....................................      65,974      127,403
   Accounts receivable, net of allowance for doubtful accounts of $196 and $68,
     respectively ................................................................       2,258        2,558
   Notes receivable ..............................................................       1,000        2,100
   Inventory, net ................................................................       1,583        4,128
   Other current assets ..........................................................       1,414        1,272
                                                                                     ---------    ---------

Total current assets .............................................................      84,228      182,192

Restricted cash ..................................................................       1,439        1,492
Property and equipment, net of accumulated depreciation of $1,665 and $1,172,
   respectively ..................................................................       3,869        4,679
Intangibles, net of accumulated amortization of $0 and $3,828, respectively ......        --         12,257
Accounts receivable, non current portion .........................................       2,061        3,409
Long-term equity investments .....................................................       1,484        7,734
Other assets .....................................................................         244          543
                                                                                     ---------    ---------

                                                                                     $  93,325    $ 212,306
                                                                                     =========    =========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ..............................................................   $     366    $   3,530
   Net liabilities associated with discontinued operations .......................       7,884       56,595
   Other accrued expenses ........................................................       4,319        6,002
   Current portion of long-term debt .............................................         161        2,161
                                                                                     ---------    ---------

Total current liabilities ........................................................      12,730       68,288

Long-term debt, net of current portion ...........................................       1,444        2,104
Business acquisition liability ...................................................          --        2,000
                                                                                     ---------    ---------

Total liabilities ................................................................      14,174       72,392
                                                                                     ---------    ---------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $0.10 par value, 3,970,000 shares designated, no shares issued
     and outstanding .............................................................          --           --
   Common stock, $0.01 par value, 100,000,000 shares authorized; 27,447,798 and
     28,523,474 shares issued; 25,157,298 and 28,113,974 shares outstanding,
     respectively ................................................................         275          264
   Additional-paid-in capital ....................................................     480,255      503,802
   Deferred stock compensation ...................................................      (4,296)     (28,577)
   Accumulated other comprehensive loss ..........................................        (448)        (696)
   Accumulated deficit ...........................................................    (387,498)    (332,600)
   Treasury stock, at cost, 2,290,500 and 409,500 shares, respectively ...........      (9,137)      (2,279)
                                                                                     ---------    ---------

Total stockholders' equity .......................................................      79,151      139,914
                                                                                     ---------    ---------

                                                                                     $  93,325    $ 212,306
                                                                                     =========    =========


</TABLE>



   The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                     - 2 -

<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Operations
                      (In thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                          Three Months              Nine Months
                                                          Ended June 30,            Ended June 30,
                                                     ---------------------   ----------------------
                                                           2001     2000         2001         2000
                                                           ----     ----         ----         ----

<S>                                                   <C>         <C>         <C>         <C>
Net sales .........................................   $    811    $  5,972    $  3,211    $  6,644
Cost of sales .....................................      1,406       5,350       7,995       6,991
                                                      --------    --------    --------    --------

   Gross profit (loss) ............................       (595)        622      (4,784)       (347)
                                                      --------    --------    --------    --------

Operating expenses:
   Selling and marketing, exclusive of non-cash
     compensation expense (benefit) of $0, $0, $0
     and $(166), respectively .....................        304       1,329       2,148       3,686
   Engineering, exclusive of non-cash compensation
     expense (benefit) of $(5), $42, $61 and $11,
     respectively .................................        854       1,531       3,710       2,810
   General and administrative, exclusive of
     non-cash compensation expense (benefit) of
     $483, $3,921, $(1,087) and $13,172,
     respectively .................................      2,374       3,728       8,748       9,468
   Depreciation ...................................        286         263         975         662
   Amortization ...................................         --         575       1,149       1,723
   Non-cash compensation expense (benefit) related
     to stock options .............................        478       3,963      (1,026)     13,017
   Provision for impaired assets ..................      3,684          --      28,553          --
   Restructuring expense ..........................      1,290          --       5,190          --
                                                      --------    --------    --------    --------

Total operating expenses ..........................      9,270      11,389      49,447      31,366
                                                      --------    --------    --------    --------
Loss from continuing operations before other income
   (expense), income taxes, discontinued operations
   and extraordinary item .........................     (9,865)    (10,767)    (54,231)    (31,713)
Other income (expense):
   Interest income ................................      1,230       3,324       5,525       8,887
   Interest expense ...............................         (4)       (108)        (89)       (425)
   Equity in net losses of investee companies .....         --        (191)       (394)       (191)
   Miscellaneous expense, net .....................        (42)         (1)       (207)        (36)
                                                      --------    --------    --------    --------

Loss from continuing operations before income
   taxes, discontinued operations and extraordinary
   item ...........................................     (8,681)     (7,743)    (49,396)    (23,478)
Provision for income taxes ........................         --          --          --          --
                                                      --------    --------    --------    --------

Loss from continuing operations before discontinued
   operations and extraordinary item ..............     (8,681)     (7,743)    (49,396)    (23,478)
Loss from discontinued operations, net of tax .....         --     (18,247)         --     (45,248)
Loss on disposition of discontinued operations, net
   of tax .........................................     (4,100)         --      (6,828)         --
Extraordinary item - Gain on settlements of
   outstanding obligations, net of tax ............         --          --       1,326          --
                                                      --------    --------    --------    --------

Net loss ..........................................   $(12,781)   $(25,990)   $(54,898)   $(68,726)
                                                      ========    ========    ========    ========

Basic and diluted loss per common share:
   Loss from continuing operations ................   $  (0.35)   $  (0.30)   $  (1.98)   $  (1.03)

   Discontinued operations ........................      (0.16)      (0.72)      (0.27)      (1.99)
   Extraordinary item .............................         --          --        0.05          --
                                                      --------    --------    --------    --------
   Net loss .......................................   $  (0.51)   $  (1.02)   $  (2.20)   $  (3.02)
                                                      ========    ========    ========    ========
Shares used to compute basic and diluted loss per
   common share ...................................     25,157      25,368      24,974      22,742
                                                      ========    ========    ========    ========

</TABLE>



   The accompanying notes are an integral part of these condensed consolidated
                              financial statements.

                                     - 3 -

<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                       Nine months ended June 30,
                                                                                       --------------------------
                                                                                          2001            2000
                                                                                          ----            ----
Cash flows from operating activities:

<S>                                                                                <C>           <C>
   Net loss .......................................................................$    (54,898) $    (68,726)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Loss from discontinued operations ............................................          --        45,248
     Loss on disposal of discontinued operations ..................................       6,828            --
     Extraordinary item - gain on settlements of outstanding obligations ..........      (1,326)           --
     Provision for impaired assets ................................................      28,553            --
     Provision for restructuring costs ............................................       5,190            --
     Depreciation and amortization ................................................       2,124         2,385
     Amortization of deferred stock compensation expense (benefit) ................      (1,026)       13,017
     Amortization of deferred debt issuance costs .................................        --              53
     Provision for doubtful accounts ..............................................         178           224
     Provision for inventory losses ...............................................       4,642            --
     Loss on sale of property and equipment .......................................          35            --
     Equity in net losses of investee companies ...................................         394           191
     Realized gain on sale of short-term investments ..............................          (2)           --
     Changes in operating assets and liabilities (net of effect of acquisitions and
       discontinued operations):
       Decrease (increase) in accounts receivable, net ............................       1,470       (4,169)
       Increase in inventory ......................................................      (2,097)      (2,398)
       Increase in other current assets ...........................................        (233)      (3,428)
       Decrease (increase) in other assets ........................................         111           (3)
       Decrease in accounts payable and accrued expenses ..........................      (9,984)      (3,212)
                                                                                      ---------    ---------

Net cash used in operating activities of continuing operations ....................     (20,041)     (20,818)
Net cash used in operating activities of discontinued operations ..................     (57,900)     (29,586)
                                                                                      ---------    ---------

Net cash used in operating activities .............................................     (77,941)     (50,404)
                                                                                      ---------    ---------

Cash flows from investing activities:

   Proceeds from maturities and sales (payment for purchases) of short-term
     investments, net .............................................................      51,648     (102,669)
   Proceeds from sale of property and equipment ...................................          23           --
   Payment for purchase of Laptop Lane Limited, net of cash acquired ..............        --         (1,166)
   Payments for purchase of equity investments ....................................        (766)      (7,529)
   Payment for purchase of property and equipment .................................      (1,420)      (2,033)
   Disbursement for promissory notes issued .......................................          --       (6,600)
   Payment for purchase of intangibles ............................................          --          (10)
   Payment received on note receivable ............................................          --        1,000
                                                                                      ---------    ---------

Net cash provided by (used in) investing activities of continuing operations ......      49,485     (119,007)
Net cash provided by (used in) investing activities of discontinued operations ....      10,146      (12,113)
                                                                                      ---------    ---------

Net cash provided by (used in) investing activities ...............................      59,631     (131,120)
                                                                                      ---------    ---------

Cash flows from financing activities:
   Proceeds from sale of common stock, net of selling costs .......................          --      128,643
   Proceeds from exercise of warrants .............................................          --        1,538
   Proceeds from exercise of options ..............................................          --        3,655
   Proceeds from purchase of common stock by employee stock purchase plan .........          77           --
   Payment for purchase of treasury stock .........................................      (6,858)          --
   Payment of long-term debt and liability related to anniversary issuance of
     common stock to former Intelligent Communications, Inc. stockholders .........      (2,490)          (1)
   Principal payments of long-term debt ...........................................        (660)          --
                                                                                      ---------    ---------

Net cash provided by (used in) financing activities of continuing operations ......      (9,931)     133,835
Net cash provided by (used in) financing activities of discontinued operations ....      (4,467)         156
                                                                                      ---------    ---------

Net cash provided by (used in) financing activities ...............................     (14,398)     133,991
Foreign exchange effect on cash and cash equivalents ..............................         (24)          --
                                                                                      ---------    ---------

Net decrease in cash and cash equivalents .........................................     (32,732)     (47,533)
Cash and cash equivalents, beginning of period ....................................      44,731       89,499
                                                                                      ---------    ---------

Cash and cash equivalents, end of period ..........................................   $  11,999    $  41,966
                                                                                      =========    =========


</TABLE>


   The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                     - 4 -

<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements

1.   Basis of Presentation

     The financial information included herein is unaudited; however, such
     information reflects all adjustments (consisting solely of normal recurring
     adjustments, except as otherwise noted) which are, in the opinion of
     management, necessary for a fair presentation of the condensed consolidated
     statements of financial position, results of operations, and cash flows as
     of and for the interim periods ended June 30, 2001 and 2000.

     SoftNet Systems, Inc.'s annual report on Form 10-K for the year ended
     September 30, 2000, as filed with the Securities and Exchange Commission,
     should be read in conjunction with the accompanying condensed consolidated
     financial statements. The condensed consolidated balance sheet as of
     September 30, 2000 was derived from SoftNet Systems, Inc. and Subsidiaries
     (the "Company") audited consolidated financial statements.

     The results of operations for the three months and the nine months ended
     June 30, 2001 are based in part on estimates that may be subject to
     year-end adjustments and are not necessarily indicative of the results to
     be expected for the full year.

     The condensed consolidated financial statements presented for the three
     months and the nine months ended June 30, 2000 have been restated for the
     effects of the discontinued operations.

     In June 1998, the the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
     Accounting for Derivative Instruments and Hedging Activities. SFAS 133
     establishes accounting and reporting standards for derivative financial
     instruments and hedging activities related to those instruments, as well as
     other hedging activities. SFAS 133, as amended by FASB Statement No. 137
     ("SFAS 137"), Accounting for Derivative Instruments and Hedging Activities
     - Deferral of the effective date of FASB Statement No. 133, is effective
     for all fiscal quarters of all fiscal years beginning after June 15, 2000.
     As required by SFAS 137, the Company adopted SFAS 133 on October 1, 2000.
     In June 2000, the FASB issued Statement No. 138 ("SFAS 138"), Accounting
     for Certain Derivative Instruments and Certain Hedging Activities. SFAS 138
     addresses certain issues related to the implementation of SFAS 133, but did
     not change the basic model of SFAS 133 or further delay the implementation
     of SFAS 133. To date, the Company has not invested in derivative
     instruments and has not engaged in hedging activities. Accordingly, the
     effects of adopting SFAS 133 did not have an impact on the Company's
     financial position, results of operations or cash flows.

2.   Discontinued Operations

     Discontinued Operations of Aerzone Corporation ("Aerzone")

     On December 19, 2000, the Company decided to discontinue the business of
     Aerzone, a Delaware corporation, in light of significant long-term capital
     needs and the difficulty of securing the necessary financing because of the
     current state of the financial markets. The Company is attempting to sell
     Laptop Lane Limited ("Laptop Lane"), a part of the Aerzone business.
     Although it is difficult to predict the final results, the loss from
     discontinued operations includes management's estimates of costs to wind
     down the business, costs to settle its outstanding liabilities, and
     estimated proceeds from the sale of assets including Laptop Lane. The
     actual results could differ materially from these estimates. The operating
     results of Aerzone have been segregated from continuing operations and are
     reported as loss from discontinued operations, net of tax on the
     consolidated statements of operations for the three months and the nine
     months ended June 30, 2000. The assets and liabilities of such operations
     are included in net liabilities associated with discontinued operations on
     the condensed consolidated balance sheets as of June 30, 2001 and September
     30, 2000.

     Operating results of Aerzone for the three months and the nine months ended
     June 30, 2000 are as follows (in thousands):

                                            Three months     Nine months
                                                ended           ended
                                            June 30, 2000   June 30, 2000
                                            -------------   -------------

           Revenues .................       $         902   $         902
                                            ==============   ============

           Loss before income taxes .       $      (2,730)  $      (2,730)
           Provision for income taxes                  --              --
                                            --------------   -------------

           Net loss .................       $      (2,730)  $      (2,730)
                                            ==============   =============


                                     - 5 -

<PAGE>

Net liabilities associated with discontinued operations of Aerzone at June 30,
2001 and September 30, 2000 are as follows (in thousands):

                                                 June 30,   September 30,
                                                   2001         2000
                                                   ----         ----

   Current assets ...................           $    --      $  1,851
   Property, plant and equipment, net                --         4,226
   Other assets .....................                --           241
                                                --------     --------

   Total assets .....................           $    --      $  6,318
                                                ========     ========

   Current liabilities ..............           $(5,135)     $ 25,202
                                                ========     ========

   Net liabilities associated with
     discontinued operations ........           $(5,135)     $(18,884)
                                                ========     ========

The Company increased the estimated loss on disposal reserve of Aerzone by
$15,836,000 for the nine months ended June 30, 2001, primarily as a result of
the Company reducing the estimated proceeds from the sale of Laptop Lane and
increasing estimated discontinued operating costs. The Company recognized
additional estimated loss on disposal provision of Aerzone of $8,736,000 for the
three months ended March 31, 2001 and $7,100,000 for the three months ended June
30, 2001. The estimated loss on disposal reserve of Aerzone is reflected in net
liabilities of discontinued operations of the condensed consolidated balance
sheet as of June 30, 2001, and the corresponding charge is reflected in loss on
disposal of discontinued operations, net of tax on the condensed consolidated
statement of operations for the three and nine months ended June 30, 2001.

Discontinued Operations of ISP Channel, Inc. ("ISP Channel")

On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue providing cable-based Internet services through ISP Channel by June
30, 2001, due to (1) consolidation in the cable television industry made it
difficult for ISP Channel to achieve the economies of scale necessary to provide
such services profitably, and (2) the Company was no longer able to bear the
costs of maintaining ISP Channel. The process of winding down ISP Channel was
substantially completed by June 30, 2001. Although it is difficult to predict
the final results, the loss from discontinued operations includes management's
estimates of costs to wind down the business, costs to settle its outstanding
liabilities, and the proceeds from the sale of assets. The actual results could
differ materially from these estimates. The operating results of ISP Channel
have been segregated from continuing operations and are reported as loss from
discontinued operations, net of tax on the consolidated statements of operations
for the three months and the nine months ended June 30, 2000. The assets and
liabilities of such operations are included in net liabilities associated with
discontinued operations on the condensed consolidated balance sheets as of June
30, 2001 and September 30, 2000.

Operating results of ISP Channel for the three months and the nine months ended
June 30, 2000 are as follows (in thousands):

                                             Three months    Nine months
                                                ended           ended
                                            June 30, 2000   June 30, 2000
                                            -------------   -------------

          Revenues .................         $    1,701       $  3,996
                                             ==========       ========

          Loss before income taxes .         $  (15,517)      $(42,518)
          Provision for income taxes                 --             --
                                             ----------       --------

          Net loss .................         $  (15,517)      $(42,518)
                                             ==========       ========

                                     - 6 -

<PAGE>

Net liabilities associated with discontinued operations of ISP Channel at June
30, 2001 and September 30, 2000, are as follows (in thousands):

                                                   June 30,   September 30,
                                                    2001         2000
                                                    ----         ----

             Current assets ...................   $   201     $  4,170
             Property, plant and equipment, net        --       12,890
             Other assets .....................        --          222
                                                  -------     --------

             Total assets .....................   $   201     $ 17,282
                                                  =======     ========

             Current liabilities ..............   $ 2,890     $ 47,237
             Long-term debt ...................        --        1,615
             Capital lease obligation .........        60        6,141

             Total liabilities ................   $ 2,950     $ 54,993
                                                  =======     ========

             Net liabilities associated with
             discontinued operations ..........   $(2,749)    $(37,711)
                                                  =======     ========

     On February 16, 2001, the Company and ISP Channel entered into agreements
     with Mediacom LLC ("Mediacom"), to terminate Mediacom's affiliate
     relationship with ISP Channel. As part of these agreements Mediacom
     released all obligations under the affiliate agreement with ISP Channel and
     returned 1,300,000 restricted common stock shares of the Company, and in
     exchange received certain equipment, a $3,768,000 payment from the Company,
     and the Company unrestricted 800,000 shares of its common stock valued at
     $1,500,000 that was held by Mediacom.

     Mediacom currently holds a total of 2,200,000 unrestricted common stock
     shares. Pursuant to these agreements, neither the Company nor ISP Channel
     has any further material obligation to Mediacom.

     The Company decreased the estimated loss on disposal reserve of ISP Channel
     by $9,008,000 for the nine months ended June 30, 2001, primarily as a
     result of the Company experiencing better than previously estimated
     contract settlements. The Company reduced the estimated loss on disposal
     reserve of ISP Channel by $6,008,000 for the three months ended March 31,
     2001 and $3,000,000 for the three months ended June 30, 2001. The estimated
     loss on disposal reserve of ISP Channel is reflected in net liabilities of
     discontinued operations of the condensed consolidated balance sheet as of
     June 30, 2001, and the corresponding benefit is reflected in loss on
     disposal of discontinued operations, net of tax on the condensed
     consolidated statement of operations for the three and nine months ended
     June 30, 2001.

3.   Restructuring Charge

     On December 28, 2000, the Company's Board of Directors approved a plan to
     reduce its corporate headquarters staff in conjunction with discontinuing
     the Aerzone and ISP Channel businesses. As a result of this plan, the
     Company established a $3,900,000 restructuring reserve, which consists
     primarily of severance costs for affected employees, and is reflected in
     other accrued expenses on the condensed consolidated balance sheet as of
     June 30, 2001. Through June 30, 2001, $3,329,000 of severance payments has
     been applied to this reserve. The remainder of $571,000 will be utilized
     for severance for identified employees and relocation costs of Company
     headquarters.

     In an effort to bring Intelligent Communications, Inc. ("Intellicom") to
     profitability, the Company initiated an overall cost cutting program and
     organizational restructuring during May 2001. As a result of the
     organizational restructuring, the Company established a $1,290,000
     retructuring reserve, which consists of severance costs for affected
     employees and shut down costs for certain offices, and is reflected in
     other accrued expenses on the condensed consolidated balance sheet as of
     June 30, 2001. Through June 30, 2001, $397,000 of severance payments, and
     write offs of leasehold improvements and office furniture related to the
     various offices have been applied to this reserve. The remainder of
     $893,000 will be utilized for severance for identified employees and
     leasehold termination obligations related to the various offices.

4.   Cash, Cash Equivalents and Short-Term Investments, Available-for-Sale

     Cash equivalents consist of securities with maturities of three months or
     less at date of purchase. Short-term investments, available-for-sale are
     carried at fair value based on quoted market prices. Net unrealized holding
     losses amounted to $428,000 , which is based on management's assessment of
     its ability to sell certain securities at market value on June 30, 2001,
     and is reflected in accumulated other comprehensive loss on the condensed
     consolidated balance sheet as of June 30, 2001.

     Short-term investments, available-for-sale as of June 30, 2001, consist of
     $10,854,000 of debt securities that mature

                                     - 7 -

<PAGE>

     between three months to one year, $55,056,000 of debt securities that
     mature between one to five years, and $64,000 of common stock. Cash, cash
     equivalents and short-term investments, available-for-sale consisted of the
     following as of June 30, 2001 (in thousands):

<TABLE>
<CAPTION>


                                                                      Unrealized      Unrealized
                                                              Cost          gain           loss           Market
                                                              ----          ----           ----           ------
        Cash and cash equivalents:
<S>                                                   <C>            <C>             <C>            <C>
           Cash ....................................  $       1,645  $            -  $           -  $        1,645
           Foreign debt securities .................          2,002               -              -           2,002
           Money market funds ......................          8,352               -              -           8,352
                                                      -------------  --------------  -------------  --------------

                                                      $      11,999  $            -  $           -  $       11,999
                                                      =============  ==============  =============  ==============

        Short-term investments, available-for-sale:
           Market auction securities ...............  $      44,352  $            2  $           -  $       44,354
           Mortgage-backed securities ..............          3,000              10              -           3,010
           Foreign debt securities .................          2,999               4              -           3,003
           Corporate debt securities ...............         15,783                           (240)         15,543
           Common stock ............................            268               -           (204)             64
                                                      -------------  --------------  -------------  --------------

                                                      $      66,402  $           16  $        (444) $       65,974
                                                      =============  ==============  =============  ==============
</TABLE>



     The Company recognized an other than temporary decline of certain
     short-term common stock investments, available-for-sale of $10,336,000 for
     the nine months ended June 30, 2001, as a result of these investee
     companies ability to remain viable. The Company recognized an other than
     temporary decline of $6,652,000 for the three months ended March 31, 2001
     and $3,684,000 for the three months ended June 30, 2001, which is based on
     the change in purchase price at the date of acquisition and market value of
     the common stock investment at June 30, 2001. The other than temporary
     decline is reflected in the provision for impaired assets on the condensed
     consolidated statement of operations for the three months and nine months
     ended June 30, 2001.

5.   Inventory

     The Company established a $4,642,000 inventory reserve, consisting of
     $4,135,000 for the three months ended March 31, 2001 and $507,000 for the
     three months ended June 30, 2001. The inventory reserve is comprised of two
     components: obsolescence for inventory quantities in excess of anticipated
     sales using current technology and for reduction of inventory to market
     value. The inventory reserve is reflected in inventory, net on the
     condensed consolidated balance sheet as of June 30, 2001, and the charge
     for the inventory reserve is reflected in cost of sales on the condensed
     consolidated statement of operations for the three and nine months ended
     June 30, 2001.

6.   Equity Investments and Notes Receivable

     During March 2001, the Company recognized a permanent impairment of certain
     long-term equity investments, notes receivable, and related interest
     receivable in the amount of $7,109,000, as a result of problems facing
     these investee companies in attempting to raise needed follow-on financing
     to cover projected cash shortfalls under current stock market conditions.
     The permanent impairment is reflected in the provision for impaired assets
     on the condensed consolidated statement of operations for the nine months
     ended June 30, 2001.

7.   Intangible Assets

     During March 2001, the Company determined that the carrying value of the
     intangible asset associated with the developed technology from the
     acquisition of Intellicom exceeded its net realizable value as supported by
     an analysis of estimated undiscounted future cash flows. This impairment is
     a result of several companies introducing competing products and services,
     and reduced demand for Intellicom's products and services. Accordingly, the
     Company wrote off the remaining unamortized intangible amount of
     $11,108,000, which is reflected in the provision for impaired assets on the
     condensed consolidated statement of operations for the nine months ended
     June 30, 2001.

8.   Long-Term Debt and Business Acquisition Liability

     On November 15, 2000, the Company repaid the $660,000 principal balance of
     the 6% Convertible Subordinated Secured Debentures and the related accrued
     interest.

                                     - 8 -

<PAGE>

On February 7, 2001, the Company made an offer to the former Intelligent
Communications, Inc. ("Intellicom") stockholders to pay a discounted amount in
lieu of the Company's obligation to pay cash and stock for the remaining
consideration which was to be paid in connection with the Intellicom acquisition
and consisted of (i) a $2,000,000 8.5% promissory note and accrued interest,
(ii) the requirement for the Company to issue $1,500,000 of common stock shares
on the second anniversary date of the Intellicom acquisition, and (iii) the
requirement for the Company to issue $500,000 of common stock shares on the
third anniversary date of the Intellicom acquisition. The parties agreed to
settle the obligation by which the Company paid $2,815,000, issued 99,922 common
stock shares valued at $199,000, and recognized a $1,326,000 gain on
extinguishment of debt.

Long-term debt is summarized as follows (in thousands):

<TABLE>
<CAPTION>

                                                                  June 30,      September 30,
                                                                    2001            2000
                                                                    ----            ----

<S>                                                            <C>             <C>
        Convertible subordinated debentures .................. $        1,444  $         2,104
        Promissory notes .....................................              -            2,000
        Other ................................................            161              161
                                                               --------------  ---------------

                                                                        1,605            4,265
        Less current portion .................................           (161)          (2,161)
                                                               --------------  ---------------

                                                               $        1,444  $         2,104
                                                               ==============  ===============
</TABLE>

9.   Supplemental Cash Flow Information

     The supplemental cash flow information is as follows (in thousands):

<TABLE>
<CAPTION>


                                                                                 Nine months ended June 30,
                                                                                 --------------------------
                                                                                       2001       2000
                                                                                       ----       ----

Cash paid during the year for:
<S>                                                                               <C>         <C>
   Interest ...................................................................   $    355    $    269
   Income taxes ...............................................................         --          --

Non-cash investing and financing activities:

   Value assigned to debt conversion feature ..................................         --          34
   Common stock issued for:
     Acquisition of Laptop Lane Limited .......................................        332      16,620
     Payment of promissory note and related interest, and business acquisition
       liability to former Intelligent Communications, Inc. stockholders ......        199       1,499
     Payment of affiliate contract termination fees with Mediacom LLC .........      1,500          --
     Payment of cable affiliate launch incentives .............................         --      24,175
     Conversion of subordinated notes .........................................         --       9,887
   Decrease in additional-paid-in capital associated with termination of common
     stock options ............................................................    (25,644)    (14,556)
   Unrealized gain (loss) on short-term investments ...........................        272        (414)

</TABLE>

10.  Segment Information

     The Company currently operates one business segment, satellite-based
     Internet services, through its wholly owned subsidiary Intellicom. Revenue
     for Intellicom consists primarily of (i) monthly service fees paid by
     customers for satellite service on a per very small aperture terminal
     ("VSAT") basis, (ii) VSAT-related equipment sales and (iii) from time to
     time contract termination fees from customers.


                                     - 9 -

<PAGE>


11.  Comprehensive Loss

     SFAS No. 130, Reporting Comprehensive Income, establishes standards of
     reporting and display of comprehensive income and its components of net
     income and other comprehensive income. Other comprehensive income refers to
     revenues, expenses, gains, and losses that are not included in net income
     but rather are recorded directly in stockholders' equity. The components of
     comprehensive loss are as follows:

<TABLE>
<CAPTION>


                                                          Three months ended June 30,    Nine months ended June 30,
                                                          ---------------------------    --------------------------
                                                              2001           2000           2001            2000
                                                              ----           ----           ----            ----
<S>                                                      <C>             <C>            <C>            <C>
Net loss ..........................................      $      (12,781) $     (25,990) $     (54,898) $      (68,726)
Unrealized gain (loss) on securities ..............               3,590           (283)           273            (414)
Foreign currency translation adjustments ..........                 (15)             -            (25)              -
                                                         --------------- -------------  -------------- --------------

Comprehensive loss                                       $       (9,206) $     (26,273) $     (54,650) $      (69,140)
                                                         ==============  =============  =============  ==============

</TABLE>


12.  Recent Accounting Pronouncements

     In December 1999, the Securities and Exchange Commission issued Staff
     Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
     Statements. SAB 101 addresses various topics in revenue recognition
     including the recognition of revenue for contracts involving multiple
     deliverables. Additionally, SAB 101 requires companies to report any
     changes in revenue recognition as a cumulative change in accounting
     principle at the time of implementation in accordance with Accounting
     Principles Board Opinion No. 20, Accounting Changes. SAB 101 is effective
     no later than the fourth fiscal quarter of fiscal years beginning after
     December 15, 1999. Accordingly, SAB 101 will be effective for the Company
     beginning July 1, 2001. Based on Management's current understanding and
     interpretation, SAB 101 will not have a material impact on the Company's
     consolidated financial statements.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
     No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial
     Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible
     Assets.

     SFAS 141 addresses the accounting for and reporting of business
     combinations. SFAS 141 requires that all business combinations be accounted
     for using the purchase method of accounting for acquisitions, and
     eliminates the use of the pooling-of-interests method. SFAS 141 is
     effective for all business combinations initiated after June 30, 2001. The
     Company believes SFAS 141 will not have a material effect on its
     consolidated financial statements.

     SFAS 142 addresses financial accounting and reporting for acquired goodwill
     and other intangible assets. SFAS 142 changes the accounting for goodwill
     from an amortization method to an impairment-only method. The amortization
     of goodwill, including goodwill recorded in past business combinations will
     cease upon adoption of the SFAS 142. For goodwill acquired by June 30,
     2001, SFAS 142 is effective for all fiscal years beginning after December
     15, 2001. Goodwill and intangible assets acquired after June 30, 2001 will
     be subject to immediate adoption of SFAS 142. The Company believes SFAS 142
     will not have a material effect on its consolidated




                                     - 10 -

<PAGE>

     financial statements.


13.  Subsequent Events

     On July 13, 2001, the Company entered into an agreement to sell its
     interest in China Broadband Corporation, consisting of 1,133,000 common
     stock shares and $1,700,000 promissory note and accrued interest, to
     Canaccord International Limited for $1,000,000. In anticipation of this
     transaction, the Company recognized an other than temporary decline of
     $9,630,000 related to the 1,133,000 common stock shares, and an permanent
     impairment of $768,000 related to the $1,700,000 promissory note and
     accrued interest for the nine months ended June 30, 2001. The company
     recognized $6,716,000 for the three months ended March 31, 2001, and
     $3,682,000 for the three months ended June 30, 2001. These amounts are
     reflected in the provision for impaired assets on the condensed
     consolidated statement of operations for the three months and nine months
     ended June 30, 2001.

                                     - 11 -

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the Company's annual report on Form 10-K for the year ended September 30, 2000,
as filed with the Securities and Exchange Commission, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as those discussed elsewhere in this quarterly report. Statements contained
herein that are not historical facts are forward-looking statements that are
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. Words such as "believes", "anticipates", "expects", "intends",
"estimates", "unlikelihood", "assessment", "foreseeable" and similar expressions
are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. A number of important factors could cause
our actual results for the year ended September 30, 2000, and beyond to differ
materially from past results and those expressed or implied in any
forward-looking statements made by us, or on our behalf. We undertake no
obligation to release publicly the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing in our annual report on Form 10-K for the year
ended September 30, 2000, as filed with the Securities and Exchange Commission
and our Condensed Consolidated Financial Statements and related Notes thereto
appearing elsewhere in this quarterly report.

Overview

On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue its ISP Channel, Inc. ("ISP Channel") subsidiary operations by June
30, 2001 because of (1) consolidation in the cable industry made it difficult
for ISP Channel to achieve the economies of scale necessary to provide such
services profitably, and (2) the Company was no longer able to bear the costs of
maintaining the ISP Channel. This was followed by an announcement on December
19, 2000, to discontinue the Aerzone Corporation ("Aerzone") business in light
of, among other things, significant long-term capital needs and the difficulty
of securing the necessary financing because of the financial markets. As part of
the discontinuance of the Aerzone business, the Company announced its intent to
sell the Laptop Lane Limited ("Laptop Lane") business.

The Company is currently exploring whether it will develop new lines of business
as well as other alternative uses for the cash and other assets that will remain
after the discontinuance of ISP Channel and Aerzone. To date the Board of
Directors has not proposed a new strategic direction for SoftNet Systems.

The Company currently conducts its continuing operations through its wholly
owned subsidiary, Intelligent Communications, Inc. ("Intellicom"), which
provides two-way broadband satellite connectivity utilizing very small aperture
terminal ("VSAT") technology to a wide variety of business customers.

Revenue for Intellicom consists primarily of (i) monthly service fees paid by
customers for satellite service on a per VSAT basis, (ii) VSAT-related equipment
sales, and (iii) from time to time, contract termination fees from customers.

Cost of sales for Intellicom consists primarily of connectivity cost and costs
of VSAT equipment sold. Intellicom's connectivity cost consists primarily of
satellite transponder fees. Currently, Intellicom has transponder space on one
satellite, SatMex 5, which provides coverage over the continental United States,
Caribbean and Latin America.

The Company reports operating expenses in several categories: (i) selling and
marketing includes, in addition to the costs of selling and marketing the
Company's services to end users, customer care and content production; (ii)
engineering, which includes the costs of maintaining and manning the network
operations center, field engineering and information technology; and (iii)
general and administrative costs. Also included in operating expenses are
depreciation, amortization and compensation related to stock options.
Amortization expense consists primarily of the periodic write off of developed
technology acquired. Compensation related to stock options relates primarily to
the amortization of deferred stock compensation resulting from below market
value stock options granted between October 1998 and March 1999.

In an effort to bring Intellicom to profitability, the Company initiated an
overall cost cutting program and organizational restructuring, which includes
the elimination of certain departments and closure of certain offices. As

                                     - 12 -

<PAGE>

a result the Company expects Intellicom's costs to decrease in the foreseeable
future.

The results of operations for the three months ended and the nine months ended
June 30, 2000, have been restated for the effects of discontinued operations.

Results of operations for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000

Net Sales. Consolidated net sales are attributable entirely to Intellicom, which
decreased $5,161,000, or 86%, to $811,000 for the three months ended June 30,
2001, compared to $5,972,000 for the three months ended June 30, 2000, primarily
as a result of VSAT equipment sales to Tricom, S.A for the three months ended
June 30, 2000. Net sales from Intellicom's core business of satellite-based
Internet services increased $500,000, or 276%, to $681,000 for the three months
ended June 30, 2001, compared to $181,000 for the three months ended June 30,
2000, primarily as a result of providing VSAT satellite service related to
equipment sold to Tricom, S.A. Equipment sales decreased $5,474,000 to $72,000
for the three months ended June 30, 2001, compared to $5,546,000 for the three
months ended June 30, 2000, primarily as a result of VSAT equipment sales to
Tricom, S.A for the three months ended June 30, 2000. Other sources of sales
decreased $187,000 to $58,000 for the three months ended June 30, 2001, compared
to $245,000 for the three months ended June 30, 2000.

Cost of Sales. Consolidated cost of sales are attributable entirely to
Intellicom, which decreased $3,944,000, or 74%, to $1,406,000 for the three
months ended June 30, 2001, compared to $5,350,000 for the three months ended
June 30, 2000, primarily as a result of VSAT equipment sales to Tricom, S.A for
the three months ended June 30, 2000, offset by the write down of inventory to
market value. The largest component of Intellicom's cost of sales is equipment
costs, which amounted to $500,000, primarily consisting of the write down of
inventory to market value, for the three months ended June 30, 2001; compared to
$4,364,000, primarily consisting of equipment costs related to the VSAT
equipment sales to Tricom, S.A., for the three months ended June 30, 2000.
Intellicom's transponder fees decreased to $844,000 for the three months ended
June 30, 2001, compared to $847,000 for the three months ended June 30, 2000.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash compensation expense of $0 for 2001 and $0 for 2000) decreased
$1,025,000, or 77%, to $304,000 for the three months ended June 30, 2001,
compared to $1,329,000 for the three months ended June 30, 2000.

Intellicom's selling and marketing expenses decreased $582,000, or 66%, to
$295,000 for the three months ended June 30, 2001, compared to $877,000 for the
three months ended June 30, 2000, primarily due to staff reductions as part of
an organizational restructuring.

Corporate selling and marketing expenses decreased $443,000, or 98%, to $9,000
for the three months ended June 30, 2001, compared to $452,000 for the three
months ended June 30, 2000, primarily as a result of eliminating the business
development and public relations departments as part of a corporate
restructuring.

Engineering. Consolidated engineering expenses (exclusive of non-cash
compensation expense (benefit) of $(5,000) for 2001 and $42,000 for 2000)
decreased $677,000, or 44%, to $854,000 for the three months ended June 30,
2001, compared to $1,531,000 for the three months ended June 30, 2000.

Intellicom's engineering expenses decreased $585,000, or 43%, to $783,000 for
the three months ended June 30, 2001, compared to $1,368,000 for the three
months ended June 30, 2000, primarily due to staff reductions as part of an
organizational restructuring.

Corporate engineering expenses decreased $92,000, or 56%, to $71,000 for the
three months ended June 30, 2001, as compared to $163,000 for the three months
ended June 30, 2000, primarily as a result of eliminating the corporate
technology department as part of a corporate restructuring.

General and Administrative. Consolidated general and administrative expenses
(exclusive of non-cash compensation expense of $483,000 for 2001 and $3,921,000
for 2000) decreased $1,354,000, or 36%, to $2,374,000 for the three months ended
June 30, 2001, compared to $3,728,000 for the three months ended June 30, 2000.

Intellicom's general and administrative expenses increased $198,000, or 35%, to
$762,000 for the three months ended June 30, 2001, compared to $564,000 for the
three months ended June 30, 2000, primarily as a result of increased personnel
costs and leasing of additional offices in Livermore, California and Sunrise,
Florida.

Corporate general and administrative expenses decreased $1,552,000, or 49%, to
$1,612,000 for the three months ended June 30, 2001, compared to $3,164,000 for
the three months ended June 30, 2000, primarily as a result of staff reductions
as part of a corporate restructuring.


                                     - 13 -

<PAGE>


Depreciation and Amortization. Consolidated depreciation and amortization
expenses decreased $552,000, or 66%, to $286,000 for the three months ended June
30, 2001, compared to $838,000 for the three months ended June 30, 2000.

Intellicom's depreciation and amortization expense decreased $531,000, or 72%,
to $208,000 for the three months ended June 30, 2001, compared to $739,000 for
the three months ended June 30, 2000, primarily due to no amortization expense
for the three months ended June 30, 2001, as a result of the write off of the
intangible asset associated with the developed technology from the acquisition
of Intellicom, offset by the increased depreciation related to office furniture
and equipment for the network operations center, and the additional offices in
Livermore, California and Sunrise, Florida.

Corporate depreciation and amortization expense decreased $21,000, or 22%, to
$78,000 for the three months ended June 30, 2001, compared to $99,000 for the
three months ended June 30, 2000, primarily due to decreased depreciation as a
result of the write off of the leasehold improvements and office furniture
associated with vacated office space.

Non-Cash Compensation Expense/Benefit Related to Stock Options. The Company
recognized a non-cash compensation expense related to stock options of $478,000
for the three months ended June 30, 2001, as compared to non-cash compensation
expense related to stock options of $3,963,000 for the three months ended June
30, 2000. For the three months ended June 30, 2001, non-cash compensation
expense (benefit) related to stock options consisted of $479,000 related to
employee stock options, and $(1,000) related to non-employee options, and for
the three months ended June 30, 2000, non-cash compensation expense (benefit)
related to stock options consisted of $4,340,000 related to employee stock
options and $(377,000) related to non-employee options.

Non-cash compensation benefits are recognized following the reversal of
previously accrued expenses in respect to stock option terminations as result of
corporate restructuring. Non-cash compensation expense related to stock options
should continue to decrease or generate a benefit, as the Company continues to
reduce its staff due to its discontinued operations and corporate restructuring.

Provision for Impaired Assets. The Company recognized a charge of $3,684,000 for
the three months ended June 30, 2001, for the write off of short-term equity
securities, available-for-sale.

Restructuring Expense. The Company recognized a restructuring expense of
$1,290,000 for the three months ended June 30, 2001, related to a plan to
downsize the Intellicom staff and shut down various offices.

Interest Income. Consolidated interest income decreased $2,094,000, or 63%, to
$1,230,000 for the three months ended June 30, 2001, compared to $3,324,000 for
the three months ended June 30, 2000, primarily as a result of the decrease in
cash, cash equivalents and short-term investments, available-for-sale, and lower
interest rates.

Interest Expense. Consolidated interest expense decreased $104,000, or 96%, to
$4,000 for the three months ended June 30, 2001, compared to $108,000 for the
three months ended June 30, 2000. This decrease is primarily due to the
conversion of the 9% senior subordinated convertible notes, payment of the 6%
subordinated convertible notes, and payment of the 8.5% promissory note to
former Intellicom stockholders.

Miscellaneous Expense, Net. Miscellaneous expense was $42,000 for the three
months ended June 30, 2001, compared to miscellaneous expense of $1,000 for the
three months ended June 30, 2000.

Income Taxes. The Company made no provision for income taxes for the three
months ended June 30, 2001 and 2000, as a result of the Company's continuing
losses.

Loss from Discontinued Operations. The Company recognized a $4,100,000 loss from
discontinued operations for the three months ended June 30, 2001, compared to a
loss of $18,247,000 for the three months ended June 30, 2000. This consisted of
a $3,000,000 gain on the disposal of ISP Channel, resulting from lower than
anticipated costs of closing ISP Channel, and a $7,100,000 loss on the disposal
of Aerzone, resulting primarily from the reduction of the anticipated sales
price of Laptop Lane, for the three months ended June 30, 2001. This is compared
to a $15,517,000 net loss from the operations of ISP Channel and a $2,730,000
net loss from the operations of Aerzone for the three months ended June 30,
2000.

Net Loss. The Company had a net loss of $12,781,000, or a net loss per share of
$0.51, for the three months ended June 30, 2001, compared to a net loss of
$25,990,000, or a net loss per share of $1.02, for the three months ended June
30, 2000.

                                     - 14 -

<PAGE>

Results of operations for the nine months ended June 30, 2001 compared to the
nine months ended June 30, 2000

Net Sales. Consolidated net sales are attributable entirely to Intellicom, which
decreased $3,433,000, or 52%, to $3,211,000 for the nine months ended June 30,
2001, compared to $6,644,000 for the nine months ended June 30, 2000, primarily
as a result of VSAT equipment sales to Tricom, S.A for the nine months ended
June 30, 2000. Net sales from Intellicom's core business of satellite-based
Internet services increased $1,376,000, or 221%, to $1,998,000 for the nine
months ended June 30, 2001, as compared to $622,000 for the nine months ended
June 30, 2000, primarily as a result of providing VSAT satellite service related
to equipment sold to Tricom, S.A. Equipment sales decreased $5,012,000 to
$631,000 for the nine months ended June 30, 2001, compared to $5,643,000 for the
nine months ended June 30, 2000, primarily as a result of VSAT equipment sales
to Tricom, S.A for the nine months ended June 30, 2000. Other sources of sales
increased $203,000 to $582,000 for the nine months ended June 30, 2001, compared
to $379,000 for the nine months ended June 30, 2000, primarily as a result of
termination fees.

Cost of Sales. Consolidated cost of sales increased $1,004,000, or 14%, to
$7,995,000 for the nine months ended June 30, 2001, compared to $6,991,000 for
the nine months ended June 30, 2000, primarily as a result of the write down of
inventory to market value for the nine months ended June 30, 2001 and the space
segment leasing of a full transponder beginning on December 1, 1999, offset by
VSAT equipment sales to Tricom, S.A for the nine months ended June 30, 2000. The
largest component of Intellicom's cost of sales is equipment costs, which
amounted to $5,088,000, primarily consisting of the write down of inventory to
market value, for the nine months ended June 30, 2001; compared to $4,443,000,
primarily consisting of equipment costs related to the VSAT equipment sales to
Tricom, S.A., for the nine months ended June 30, 2000. Intellicom's transponder
fees increased to $2,614,000 for the nine months ended June 30, 2001, compared
to $2,203,000 for the nine months ended June 30, 2000.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash compensation expense (benefit) of $0 for 2001 and $(166,000) for 2000)
decreased $1,538,000, or 42%, to $2,148,000 for the nine months ended June 30,
2001, compared to $3,686,000 for the nine months ended June 30, 2000.

Intellicom's selling and marketing expenses decreased $86,000, or 4%, to
$1,952,000 for the nine months ended June 30, 2001, compared to $2,038,000 for
the nine months ended June 30, 2000, primarily as a result of staff reductions
as part of a organizational restructuring.

Corporate selling and marketing expenses decreased $1,452,000, or 88%, to
$196,000 for the nine months ended June 30, 2001, compared to $1,648,000 for the
nine months ended June 30, 2000, primarily as a result of eliminating the
business development and public relations departments as part of a corporate
restructuring.

Engineering. Consolidated engineering expenses (exclusive of non-cash
compensation expense (benefit) of $61,000 for 2001 and $11,000 for 2000)
increased $900,000, or 32%, to $3,710,000 for the nine months ended June 30,
2001, as compared to $2,810,000 for the nine months ended June 30, 2000.

Intellicom's engineering expenses increased $682,000, or 27%, to $3,181,000 for
the nine months ended June 30, 2001, compared to $2,499,000 for the nine months
ended June 30, 2000, primarily as a result of increased personnel costs to
support the then-anticipated future business.

Corporate engineering expenses increased $218,000, or 70%, to $529,000 for the
nine months ended June 30, 2001, compared to $311,000 for the nine months ended
June 30, 2000, primarily as a result of the formation of an information
technology department, offset by the elimination of the corporate technology
department as part of a corporate restructuring.

General and Administrative. Consolidated general and administrative expenses
(exclusive of non-cash compensation expense (benefit) of $(1,087,000) for 2001
and $13,172,000 for 2000) decreased $720,000, or 8%, to $8,748,000 for the nine
months ended June 30, 2001, compared to $9,468,000 for the nine months ended
June 30, 2000.

Intellicom's general and administrative expenses increased $1,079,000, or 85%,
to $2,345,000 for the nine months ended June 30, 2001, compared to $1,266,000
for the nine months ended June 30, 2000, primarily as a result of increased
personnel costs to support the then-anticipated future business.

Corporate general and administrative expenses decreased $1,799,000, or 22%, to
$6,403,000 for the nine months ended June 30, 2001, compared to $8,202,000 for
the nine months ended June 30, 2000, primarily as a result of staff reductions
as part of a corporate restructuring.

Depreciation and Amortization. Consolidated depreciation and amortization
expenses decreased $261,000, or 11%, to $2,124,000 for the nine months ended
June 30, 2001, compared to $2,385,000 for the nine months ended June 30, 2000.

                                     - 15 -

<PAGE>

Intellicom's depreciation and amortization expense decreased $256,000, or 12%,
to $1,842,000 for the nine months ended June 30, 2001, compared to $2,098,000
for the nine months ended June 30, 2000, primarily due to no amortization
expense since March 31, 2001 as a result of the write off of the intangible
asset associated with the developed technology from the acquisition of
Intellicom, offset by the increased depreciation related to office furniture and
equipment for the network operations center, and the additional offices in
Livermore, California and Sunrise, Florida.

Corporate depreciation and amortization expense decreased $5,000, or 2%, to
$282,000 for the nine months ended June 30, 2001, compared to $287,000 for the
nine months ended June 30, 2000.

Non-Cash Compensation Expense/Benefit Related to Stock Options. The Company
recognized a non-cash compensation benefit related to stock options of
$1,026,000 for the nine months ended June 30, 2001, compared to non-cash
compensation expense related to stock options of $13,017,000 for the nine months
ended June 30, 2000. For the nine months ended June 30, 2001, non-cash
compensation benefit related to stock options consisted of $995,000 related to
employee stock options and $31,000 related to non-employee options, and for the
nine months ended June 30, 2000, non-cash compensation expense related to stock
options consisted of $12,708,000 related to employee stock options and $309,000
related to non-employee options.

Non-cash compensation benefits are recognized following the reversal of
previously accrued expenses in respect to stock option terminations as result of
corporate restructuring. Non-cash compensation expense related to stock options
should continue to decrease or generate a benefit, as the Company continues to
reduce its staff due to its discontinued operations and corporate restructuring.

Provision for Impaired Assets. The Company recognized a charge of $28,553,000
for the nine months ended June 30, 2001, consisting of a $17,445,000 write down
of short-term equity investments, long-term equity investments, a note
receivable and related interest, and a $11,108,000 impairment reserve of an
intangible asset associated with the developed technology from the acquisition
of Intellicom.

Restructuring Expense. The Company recognized a restructuring expense of
$5,190,000 for the nine months ended June 30, 2001, consisting of $3,900,000
related to a plan to downsize its corporate headquarters staff, and $1,290,000
related to a plan to downsize the Intellicom staff and shut down various
offices.

Interest Income. Consolidated interest income decreased $3,362,000 or 38%, to
$5,525,000 for the nine months ended June 30, 2001, compared to $8,887,000 for
the nine months ended June 30, 2000, as a result of the decrease in cash, cash
equivalents, and short-term investments, available-for-sale.

Interest Expense. Consolidated interest expense decreased $336,000, or 79%, to
$89,000 for the nine months ended June 30, 2001, compared to $425,000 for the
nine months ended June 30, 2000. This decrease is primarily due to the reduction
of interest expense resulting from the conversion of the 9% senior subordinated
convertible notes, payment of the 6% subordinated convertible notes and payment
of the 8.5% promissory note to the former Intellicom stockholders.

Equity in Net Losses of Investee Companies. The Company recognized equity in net
losses of investee companies of $394,000 for the nine months ended June 30,
2001, compared to equity in net losses of investee companies of $191,000 for the
nine months ended June 30, 2000.

Miscellaneous Expense, Net. Miscellaneous expense was $207,000 for the nine
months ended June 30, 2001, compared to miscellaneous expense of $36,000 for the
nine months ended June 30, 2000.

Income Taxes. The Company made no provision for income taxes for the nine months
ended June 30, 2001 and 2000 as a result of the Company's continuing losses.

Loss from Discontinued Operations. The Company recognized a $6,828,000 loss from
discontinued operations for the nine months ended June 30, 2001, compared to
$45,248,000 for the nine months ended June 30, 2000. This consisted of a
$9,008,000 gain on disposal of ISP Channel, resulting from lower than
anticipated costs of closing ISP Channel, and a $15,836,000 loss on disposal of
Aerzone, resulting primarily from the reduction of the anticipated sales price
of Laptop Lane, for the nine months ended June 30, 2001. This is compared to a
$42,518,000 net loss from the operations of ISP Channel and a $2,730,000 net
loss from the operations of Aerzone for the nine months ended June 30, 2000.

Extraordinary Item - Gain on Settlements of Outstanding Obligations. The Company
recognized a gain of $1,326,000 for the nine months ended June 30, 2001,
resulting from the cash payment made in lieu of the Company's obligation to pay
off the 8.5% promissory note and related interest, and to settle business
acquisition

                                     - 16 -

<PAGE>

liability to former Intellicom stockholders with common stock.

Net Loss. The Company had a net loss of $54,898,000, or a net loss per share of
$2.20, for the nine months ended June 30, 2001, compared to a net loss of
$68,726,000, or a net loss per share of $3.02, for the nine months ended June
30, 2000.

                                     - 17 -

<PAGE>

Liquidity and Capital Resources

Since September 1998, the Company has funded the significant negative cash flows
from its subsidiary operating activities and the associated capital expenditures
through a combination of public and private equity sales, convertible debt
issues and equipment leases. On April 28, 1999, the Company completed a
secondary public offering (the "Secondary Offering"), in which it sold 4,600,000
common stock shares at $33.00 per share. The Company received $141,502,000 in
cash, net of underwriting discounts, commissions and other offering costs. On
December 13, 1999, the Company completed a private placement of 5,000,000 common
stock shares for net proceeds of $128,121,000 to Pacific Century Cyberworks
Limited ("Pacific Century"). As of June 30, 2001, the Company had $77,973,000 in
cash, cash equivalents, and short-term investments compared with $196,807,000 as
of June 30, 2000.

Net cash used in operating activities of continuing operations for the nine
months ended June 30, 2001 was $20,041,000. This results from, a net loss of
$48,070,000 from continuing operations, offset by several non-cash items
including a loss on impaired assets of ($28,553,000), inventory losses
($4,642,000), restructuring charges ($5,190,000), and a decrease to net
operating assets by $10,733,000. Net cash used by operating activities of
discontinued operations was $57,900,000.

Net cash provided by investing activities of continuing operations for the nine
months ended June 30, 2001 was $49,485,000. Of this amount, $51,648,000 was
provided by proceeds from sales and maturities of short-term investments, net of
purchases, offset by $1,420,000 used to purchase property, plant and equipment,
and $766,000 used to acquire long-term equity investments. Investing activities
of discontinued operations provided $10,146,000 of net cash.

Net cash used in financing activities for the nine months ended June 30, 2001
was $9,931,000, primarily as a result of a $2,490,000 cash payment made in lieu
of the Company's obligation to pay off the 8.5% promissory note and related
interest, and to settle business acquisition liability to former Intellicom
stockholders with common stock, $660,000 principal payments of debt, and
$6,858,000 payment for purchase of treasury stock. Financing activities of
discontinued operations used $4,467,000 of net cash.

The Company believes it has sufficient cash to meet its presently anticipated
business requirements over the next twelve months including the funding of
operating losses, discontinued operations, working capital requirements, and
capital investments. The Company expects significant reductions in cash usages
from its discontinued operating activities for the year ended September 30,
2001.

                                     - 18 -

<PAGE>

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income the
Company can earn on its investment portfolio, and on the increase or decrease in
the amount of interest expense the Company must pay with respect to its various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities, which are tied to market rates. The Company does not use
derivative financial instruments in its investment portfolio. The Company
ensures the safety and preservation of its invested principal funds by limiting
default risks, market risk and reinvestment risk. The Company mitigates default
risk by investing in safe and high-credit quality securities.

The Company had short-term investments of $65,974,000 at June 30, 2001. Except
for investments in common and preferred stock, these short-term investments
consist of highly liquid investments with original maturities at the date of
purchase of between three and twenty-three months. These investments are subject
to interest rate risk and will fall in value if market interest rates increase.
The Company believes a hypothetical increase in market interest rates by 10%
from levels at June 30, 2001, would cause the fair value of these short-term
investments to fall by an immaterial amount. Since the Company is not required
to sell these investments before maturity, we have the ability to avoid
realizing losses on these investments due to a sudden change in market interest
rates. On the other hand, declines in the interest rates over time will reduce
our interest income.

The Company had an outstanding convertible debt instrument of approximately
$1,444,000 at June 30, 2001. This instrument has a fixed interest rate of 5.0%.
Because the interest rate of this instrument is fixed, a hypothetical 10%
increase in interest rates will not have a material effect on the Company.
Interest rate increases, however, will increase interest expense associated with
future borrowing by the Company, if any. The Company does not hedge against
interest rate fluctuations.

Currency Exchange Risk

The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. If the Company were to
expand globally, the risk of foreign currency exchange rate fluctuations would
increase. Therefore, in the future, the Company may consider utilizing
derivative instruments to mitigate such risks.

                                     - 19 -

<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company has no material pending litigation.

Item 2.  Changes in Securities

None

Item 3.  Defaults upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

None

                                     - 20 -

<PAGE>

Item 5.  Other Information

                Factors Affecting The Company's Operating Results

The risks and uncertainties described below are not the only ones that the
Company faces. Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial may also impair the
Company's business operations. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.

                                  Company Risks

The Company has a Limited History Operating Internet Businesses and may
fundamentally change its business direction for the future, which may make it
Difficult to Evaluate the Company's Performance and Prospects

Any evaluation of the Company's businesses will be difficult because of its
limited operating history in the Internet access and services business. The
Company acquired ISP Channel, Inc. ("ISP Channel") in June 1996, Intelligent
Communications, Inc. ("Intellicom") in February 1999 and formed Aerzone
Corporation ("Aerzone") in January 2000. Prior to 1996, the Company did not have
any experience in businesses related to the Internet or high technology, and
since the acquisition of Intellicom in February 1999 and the discontinuance of
the businesses of ISP Channel and Aerzone in December 2000, the nature of the
Company's business has changed. As a result, the Company's historical financial
information may not be indicative of the Company's future results, and the
Company's prospects are difficult to predict and may change rapidly.

The Company is currently exploring whether it will develop new lines of business
as well as other alternative uses for the cash and other assets that will remain
after the discontinuance of ISP Channel and Aerzone, and has engaged an
investment banking firm to assist in this process. To date the Board of
Directors has not proposed a new strategic direction for SoftNet Systems. The
Company cannot predict what businesses it may enter or strategies it may adopt;
and thus can offer no indication of what risks and opportunities might arise in
the context of such a new direction.

In addition with regard to its current business, the Company confronts all of
the challenges and uncertainties encountered by growing, early-stage companies,
particularly companies in the new and rapidly evolving international market for
Internet connectivity, access and related services. These challenges include the
Company's ability to:

     o    Increase the services purchased from the Company by its customers and
          the amount of revenue the Company receives from each of its customers;
     o    Satisfy the changing needs of the Company's existing and future
          customers;
     o    Acquire, develop and market new Internet services;
     o    Respond to the changing needs of the Internet access and content
          delivery market;
     o    Expand Intellicom's international customer base;
     o    Develop and maintain strategic and business relationships;
     o    Capitalize on the Company's early entrant status; and
     o    Recruit and retain key personnel.

The Company has a History of Losses and Expects to Incur Losses in the Future

The Company has sustained substantial losses over the last five fiscal years and
expects to continue to report net losses for the foreseeable future. For the
nine months ended June 30, 2001, the Company had a net loss of $54,898,000. As
of June 30, 2001, the Company had an accumulated deficit of $387,498,000. The
Company expects to incur additional losses and experience negative cash flows
related to capital expenditures and operating expenses as Intellicom expands its
satellite-based Internet services. These efforts may be more expensive than the
Company currently anticipates. The Company cannot guaranty it will ever achieve
profitability or reduce its accumulated deficit.

The Company's Quarterly Results are Unpredictable and may Adversely Affect the
Trading Price of the Company's Common Stock

The Company's operating results have fluctuated widely on a quarterly basis, and
we expect to experience fluctuation in future quarterly operating results. In
addition, the Company cannot predict with any significant degree of certainty
the Company's quarterly operating results. Many of the factors that cause the
Company's quarter-to quarter operating results to be unpredictable are largely
beyond the Company's control. Factors that impact

                                     - 21 -

-

<PAGE>

operating results include:

     o    Demand for the Company's products and services;
     o    Conditions in the Internet services industries;
     o    Timing of dispositions, acquisitions and capital expenditures;
     o    General economic conditions; and
     o    Timing and conditions of sales.

As a result, the Company believes that period-to-period comparisons of the
Company's revenues and results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance. It is likely that
in one or more future quarters the Company's results may fall below the
expectations of analysts and investors. In such event, the trading price of the
Company's common stock would likely decrease.

If the Company is unable to Successfully Operate Future Acquisitions, then the
Company's Results and Financial Condition may be Adversely Affected

The Company cannot predict if or when any prospective acquisitions will occur or
the likelihood that they will be completed on favorable terms. Acquiring a
business involves many risks, including:

     o    Disruption of the Company's ongoing business and diversion of
          resources and management time;
     o    Dilution to existing stockholders if the Company uses equity
          securities to finance acquisitions;
     o    Incurrence of unforeseen obligations or liabilities;
     o    Inability of management to maintain uniform standards, controls,
          procedures and policies;
     o    Difficulty assimilating the acquired operations and personnel;
     o    Risks of entering markets in which the Company has little or no direct
          prior experience; and
     o    Impairment of relationships with employees or customers as a result of
          changes in management.

The Company cannot assure that it will make any acquisitions or that it will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, the Company cannot assure that it will be able to
successfully integrate the acquired business into its operations or that the
acquired business will perform as expected.

The Company's Equity Investments in Other Companies may not yield any Returns

The Company has made equity investments in several Internet-related companies,
including joint ventures in other countries. In most instances, these
investments are in the form of illiquid securities of private companies. These
companies typically are in an early stage of development and may be expected to
incur substantial losses. The Company's investments in these companies may not
yield any return. Furthermore, if these companies are not successful, the
Company could incur charges related to the provision for or write-off of assets.
For example, the Company wrote down equity investments by $16,677,000. The
Company may make additional investments in the future. Losses or charges
resulting from these investments could harm the Company's operating results.

The Company does not intend to pay Dividends

The Company has not historically paid any cash dividends on the Company's common
stock and does not expect to declare any such dividends in the foreseeable
future. Payment of any future dividends will depend upon the Company's earnings
and capital requirements, the Company's debt obligations and other factors the
board of directors deems relevant.

The Company's Stock Price is Volatile

The volatility of the Company's stock price may make it difficult for holders of
the common stock to transfer their shares at the prices they want. The market
price for the Company's common stock has been volatile in the past, and several
factors could cause the price to fluctuate substantially in the future. These
factors include:

     o    Announcements of developments related to the Company's business;
     o    Fluctuations in the Company's results of operations;
     o    Sales of substantial amounts of the Company's securities into the
          marketplace;
     o    General conditions in the Company's industries or the worldwide
          economy;
     o    An outbreak of war or hostilities;
     o    A shortfall in revenues or earnings compared to securities analysts'
          expectations;
     o    Changes in analysts' recommendations or projections;
     o    Announcements of new products or services by the Company or the
          Company's competitors; and
     o    Changes in the Company's relationships with the Company's suppliers or
          customers.


                                     - 22 -

<PAGE>

The market price of the Company's common stock may fluctuate significantly in
the future, and these fluctuations may be unrelated to the Company's
performance. General market price declines or market volatility in the future
could adversely affect the price of the Company's common stock, and thus, the
current market price may not be indicative of future market prices.

Prospective Anti-Takeover Provisions could Negatively Impact the Company's
Stockholders

The Company is a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that may discourage, delay or make a change in
control of the Company more difficult or prevent the removal of incumbent
directors. In addition, the Company's certificate of incorporation and bylaws
has certain provisions that have the same effect. These provisions may have a
negative impact on the price of the Company's common stock and may discourage
third-party bidders from making a bid for the Company or may reduce any premiums
paid to stockholders for their common stock.

                                Intellicom Risks

Intellicom may fail, if its Products and Services do not Gain Commercial
Acceptance

The success of Intellicom will depend upon the willingness of new and existing
subscribers to pay the monthly fees and installation costs associated with the
service and to purchase or lease the equipment necessary to access the Internet.
Accordingly, the Company cannot predict whether Intellicom's pricing models will
be viable, whether demand for Intellicom's services will materialize at the
prices they expect to charge, or whether current or future pricing levels will
be sustainable. If Intellicom does not achieve or sustain such pricing levels or
if their services do not achieve or sustain broad market acceptance, then the
Company's business, financial condition, and prospects will be materially
adversely affected.

An Interruption in the Supply of Products and Services that Intellicom Obtains
from Third Parties could cause a Decline in Sales of Intellicom Services.

In designing, developing and supporting Intellicom's Internet services,
Intellicom relies extensively on third parties. In particular, Intellicom relies
on satellite providers, satellite dish manufacturers and Internet hardware
manufacturers and systems integrators to help build its networks. These
suppliers may experience difficulty in supplying Intellicom with products and
services sufficient to meet the needs of Intellicom or they may terminate or
fail to renew contracts for supplying these products and services to Intellicom
on terms that it finds acceptable. Any significant interruption in the supply of
any of these products or services could cause a decline in sales of Intellicom's
services.

Intellicom Derives a Significant Portion of its Revenues from Providing
Equipment and Internet Services to a Limited Number of Customers which Presents
Credit Risks and could cause Increased Expenses or Losses of Future Revenue

For the nine months ended June 30, 2001, sales to Intellicom's largest customer,
Tricom, S.A., accounted for approximately 41% of Intellicom's net revenue and as
of June 30, 2001, Tricom, S. A. accounted for approximately 96% of Intellicom's
total accounts receivable. Intellicom expects that a small number of customers
will continue to account for a significant portion of its revenue for the
foreseeable future. If any one of Intellicom's customers, especially Tricom,
discontinues its relationship for any reason, Intellicom may suffer a
significant reduction to its future revenue and may incur significant losses.

Intellicom Depends on Third-Party Carriers to Maintain its Networks and any
Interruption of its Operations due to the Failure to Maintain such Networks
would have a Material Adverse Effect on the Company's Business, Financial
Condition and Prospects

Intellicom's success will depend upon the capacity, reliability and security of
the network used to carry data between its subscribers and the Internet. A
portion of the network used by Intellicom is owned by third parties, and
accordingly Intellicom has no control over its quality and maintenance.
Currently, Intellicom has a transit agreement with MCIWorldCom to support the
exchange of traffic between its network operations center and the Internet. In
addition, Intellicom has agreements with SatMex for satellite transponder space.
The failure of any other link in the delivery chain resulting in an interruption
of Intellicom's operations would have a material adverse effect on the Company's
business, financial condition and prospects.

                                     - 23 -

<PAGE>

Intellicom's Services may be Subject to Downward Pricing Pressures, which would
Negatively Impact its Financial Results

The market for Internet access in the U.S. is subject to downward pricing
pressure caused by a number of factors, including increased competition and
technological advances. Pricing pressures outside of the U.S. in the markets
Intellicom serves may develop as international Internet access and services
become more available. To operate, Intellicom has certain costs, such as its
lease of satellite transmission capacity, which are relatively fixed and
generally not susceptible to downward pricing pressure. As a result, Intellicom
has little flexibility in lowering the price for its services. If Intellicom is
affected by downward pricing pressure, it cannot assure that it will be able to
offer Internet services at prices that are competitive or profitable.

Intellicom has a Lengthy and Complex Sales Cycle, which may Require it to Commit
Significant Resources Prior to Receiving Revenues

Intellicom targets large enterprises as ideal customers. Because the purchase of
Intellicom's products and services is a significant investment for its customer
base, Intellicom's customers generally take a long time to evaluate Intellicom's
products and services. Most of Intellicom's customers will evaluate its products
and services in a process involving multiple people and departments. In
addition, Intellicom's customers may have concerns about the introduction or
announcement of new products, services and technologies, whether by Intellicom
or by others, as well as requests for product or service enhancements.
Accordingly, Intellicom has and expects to continue to expend significant
resources educating prospective customers about the uses and benefits of its
services. Intellicom's limited historical experience indicates that its sales
cycle can range from three months to twelve months, although the cycle could be
longer due to significant delays over which Intellicom has little or no control,
such as the budgeting and approval process of its customers. As a result of this
long sales cycle, Intellicom may take a substantial amount of time to generate
revenue from sales efforts. In addition, any delay in selling Intellicom's
products and services could lead prospective customers to find alternatives from
a competitor or to develop an in-house solution. Further, Intellicom may spend a
significant amount of time and money on a potential customer that ultimately
does not purchase its services.

Intellicom's Business will Suffer and its Financial Results will Deteriorate if
it does not Continue to Expand its Customer Base

Intellicom's success depends primarily on the growth of its customer base, the
retention of its current customers and its ability to expand the number of
Internet services it offers to its customers so that revenue per customer and
overall revenue increase. If Intellicom is unable to maintain and expand its
customer base its business and financial results will suffer. Intellicom's
ability to attract new customers and, to a lesser degree, maintain current
customers, as well as its ability to increase the amount of revenue it receives
from each customer, depends on a variety of factors, including:

     o    Continued growth in demand by international ISPs and corporate
          enterprises for Internet backbone connectivity;
     o    Intellicom's ability to provide adequate bandwidth to all of its
          customers;
     o    Intellicom's ability to provide additional services across its
          network;
     o    Intellicom's ability to broadcast content around the world;
     o    The success in Intellicom's development and management of its
          strategic and business relationships;
     o    Intellicom's success in establishing and maintaining business
          relationships with content aggregators, Internet backbone
          operators and regional satellite owners; and
     o    The reliability and cost-effectiveness of Intellicom's services.

If Intellicom is unable to Maintain, Expand and Adapt its Network
Infrastructure, the Demand for its Services may Decrease

Intellicom must continue to expand and adapt its network as the number of its
international customers grows, as users place increasing demands on its network,
and as other requirements change. As Intellicom grows its customer base, it may
not be able to provide its customers with the increasing levels of data
transmission capacity that they may require for a number of reasons, such as
Intellicom's possible inability to raise the funds needed to develop the network
infrastructure to maintain adequate transmission speeds and the lack of
additional network availability from third-party suppliers of satellite and
fiber optic cable transmission capacity. Intellicom's failure to achieve or
maintain high capacity transmissions could significantly reduce demand for its
services, decreasing its revenue and harming its business and financial results.

                                     - 24 -

<PAGE>

If Intellicom Fails to Accurately Predict its Satellite Bandwidth Requirements
and Effectively Manage its Fixed Costs, the Company's Operating Results will
Suffer

If Intellicom does not obtain adequate satellite bandwidth capacity on
acceptable terms and realize corresponding customer volume for this bandwidth,
it is unlikely that Intellicom will achieve positive gross profit. Intellicom
purchases this bandwidth capacity based on its projected future needs on a
fixed-price basis in advance of the sale of its services that utilize the
bandwidth. Substantially all of this bandwidth capacity can be purchased only on
a long-term basis. Intellicom sells its services on the basis of actual usage
and total bandwidth capacity used by its customers, which changes from month to
month and is difficult to predict. If Intellicom's sales fail to match its
projections, it could be subject to periods of excess satellite capacity, which
could seriously harm its business. As a result, Intellicom must obtain enough
bandwidth to meet its projected customer needs, and Intellicom must realize
adequate volume from its customers to support and justify the bandwidth capacity
and expense. If demand from existing or potential customers exceeds Intellicom's
capacity, the quality of its service may suffer or Intellicom may be unable to
capitalize on potential business opportunities. If that happens, Intellicom may
lose existing or potential customers and its operating results would suffer.

Problems Associated with Operating in International Markets could Prevent
Intellicom from Achieving or Sustaining its Intended Growth

The majority of Intellicom's business will be derived from government
organizations, ISPs and other businesses located in foreign countries.
Intellicom's failure to manage its international operations effectively would
limit the future growth of its business. Intellicom faces certain inherent
challenges in conducting international operations, such as:

     o    Changes in telecommunications regulatory requirements or trade
          barriers restricting Intellicom's ability to deliver Internet services
          to its customers;
     o    The imposition of unanticipated fees, taxes and costs by foreign
          governments, which could significantly increase Intellicom's costs;
     o    Political and economic instability disrupting the operations of
          Intellicom's customers;
     o    Protectionist laws and business practices favoring local competition
          potentially giving unequal bargaining leverage to competitors; and
     o    Currency fluctuations increasing the cost of Intellicom's services to
          its international customers.

Intellicom's failure to adequately respond to any of these challenges could
seriously harm its operations and prospects.

Failure to Recruit and Retain Key Management, Technical and Sales Personnel will
Adversely Affect Intellicom's Ability to Operate

Intellicom's success depends, in large part, on Intellicom's ability to attract
and retain qualified technical, marketing, sales and management personnel. If
Intellicom does not attract and retain such personnel, it may not be able to
grow its business and may experience disruptions in operations. The failure to
attract or retain other key employees could have a material adverse effect on
the Company's business, financial condition and prospects.

Any Damage or Failure that Causes Interruptions in Intellicom's Operations could
have a Material Adverse Effect on its Business, Financial Condition and
Prospects

Intellicom's operations are dependent upon its ability to support a highly
complex network and avoid damages from fires, earthquakes, floods, power losses,
telecommunications and satellite failures, network software flaws, transmission
cable cuts and similar events. The occurrence of any one of these events could
cause interruptions in the services Intellicom provides. In addition, the
failure of an incumbent local exchange carrier or other service provider to
provide the communications capacity Intellicom requires, as a result of a
natural disaster, operational disruption or any other reason, could cause
interruptions in the services Intellicom provides. Any damage or failure that
causes interruptions in Intellicom's operations could have a material adverse
effect on the Company's business, financial condition and prospects.

Intellicom may be Vulnerable to Unauthorized Access, Computer Viruses and Other
Disruptive Problems, which may Result in Intellicom's Liability to its Customers
and may Deter Others from Becoming Customers

While Intellicom has taken substantial security measures, its networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet service providers and online service providers have
experienced in the past, and may experience in the future, interruptions in
service as a result of the accidental or intentional actions of Internet users.
Unauthorized access by current and former employees or others could also
potentially jeopardize the security of confidential information stored in
Intellicom's computer systems and those of

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its customers. Such events may result in Intellicom's liability to its customers
and may deter others from becoming customers, which could have a material
adverse effect on the Company's business, financial condition and prospects.
Although Intellicom intends to continue using industry-standard security
measures, such measures have been circumvented in the past, and Intellicom
cannot assure these measures will not be circumvented in the future. Eliminating
computer viruses and alleviating other security problems may cause Intellicom's
subscribers delays due to interruptions or cessation of service. Such delays
could have a material adverse effect on the Company's business, financial
condition and prospects.

Intellicom may Face Potential Liability for Defamatory or Indecent Content,
which may cause it to Modify the way it Provides Services

Any imposition of liability on Intellicom for information carried on the
Internet could have a material adverse effect on the Company's business,
financial condition and prospects. The law relating to liability of Internet
service providers and online service providers for information carried on or
disseminated through their networks is currently unsettled. A number of lawsuits
have sought to impose such liability for defamatory speech and indecent
materials. Congress has attempted to impose such liability, in some
circumstances, for transmission of obscene or indecent materials. In one case, a
court has held that an online service provider could be found liable for
defamatory matter provided through its service, on the ground that the service
provider exercised active editorial control over postings to its service.
Because of the potential liability for materials carried on or disseminated
through Intellicom's systems, the Company may have to implement measures to
reduce its exposure to such liability. Such measures may require the expenditure
of substantial resources or the discontinuation of certain products or services.

Intellicom may face Potential Liability for Information Retrieved and Replicated
that may not be Covered by its Insurance

Intellicom's liability insurance may not cover potential claims relating to
providing Internet services or may not be adequate to indemnify Intellicom for
all liability that may be imposed. Any liability not covered by insurance or in
excess of insurance coverage could have a material adverse effect on
Intellicom's business, financial condition and prospects. Because subscribers
download and redistribute materials that are cached or replicated by Intellicom
in connection with its Internet services, claims could be made against
Intellicom under both U.S. and foreign law for defamation, negligence, copyright
or trademark infringement, or other theories based on the nature and content of
such materials. These types of claims have been successfully brought against
online service providers. In particular, copyright and trademark laws are
evolving both domestically and internationally, and it is uncertain how broadly
the rights provided under these laws will be applied to online environments. It
is impossible for Intellicom to determine who the potential rights holders may
be with respect to all materials available through its services. In addition, a
number of third-party owners of patents have claimed to hold patents that cover
various forms of online transactions or online technology. As with other online
service providers, patent claims could be asserted against Intellicom based upon
its services or technologies.

Third Parties may Claim that Intellicom's Product Infringes on their
Intellectual Property, which could Result in Significant Expenses for Litigation
or for Developing or Licensing New Technology

The Internet and telecommunications industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. Third parties may assert claims that Intellicom's current or future
products, networks or ways of doing business infringe on their intellectual
property. Intellicom cannot predict whether third parties will assert these
types of claims against Intellicom or against the licensors of technology
licensed to Intellicom. Intellicom cannot predict whether such assertions would
harm its business.

If Intellicom is required to defend against these types of claims, whether they
are with or without merit or whether they are resolved in favor of or against
Intellicom or its licensors, it may face costly litigation and diversion of
management's attention and resources. As a result of these disputes, Intellicom
may have to develop or otherwise obtain non-infringing technology or enter into
licensing agreements, any of which may be costly.

A Perceived or Actual Failure by Intellicom to Achieve or Maintain High Speed
Data Transmission could Significantly Reduce Consumer Demand for its Services
and have a Material Adverse Effect on the Company's Business, Financial
Condition and Prospects

Intellicom's ability to connect and manage a substantial number of online
subscribers at high transmission speeds is unknown. Intellicom faces risks
related to its ability to scale up to potential subscriber levels while
maintaining superior performance. The actual downstream data transmission speeds
for each customer may be slower and will depend on a variety of factors,
including:

                                     - 26 -

<PAGE>

     o    Actual speed provisioned for the customer's equipment;
     o    Quality of the server used to deliver content;
     o    Overall Internet traffic congestion;
     o    The number of active customers on the network at the same time; and
     o    For Intellicom, the service quality of the networks of Intellicom's
          customers.

The actual data delivery speeds realized by customers may be significantly lower
than peak data transmission speeds and will vary depending on the customer's
hardware, operating system and software configurations. Intellicom cannot assure
it will be able achieve or maintain data transmission speeds high enough to
attract and retain its planned numbers of subscribers, especially as the number
of subscribers to its services grows. Consequently, a perceived or actual
failure by Intellicom to achieve or maintain high speed data transmission could
significantly reduce consumer demand for their services and have a material
adverse effect on the Company's business, financial condition and prospects.

Intellicom may not be able to keep Pace with Rapid Technological Changes or
Emerging Industry Standards that could make its Services Obsolete and
Unmarketable

Intellicom's services may become less useful to its customers if it is unable to
respond to technological advances that shape the Internet or alternative
technologies or services become available to them. Keeping pace with
technological advances in Intellicom's industry may require substantial
expenditures and lead time. In addition, future advances in technology or
fundamental changes in the way Internet access or other Internet services can be
delivered may render Intellicom's services obsolete or less cost competitive.
Intellicom may not be able to adequately respond to or incorporate technological
advances on a cost-effective or timely basis into its businesses.

The Internet Industry Operates in an Uncertain Legal Landscape and the Adoption
or Interpretation of Future or Existing Regulations could Harm Intellicom's
Business

The Internet and the markets in which Intellicom offers its Internet services
are relatively new. Many of the laws and regulations that govern Intellicom and
the Internet have yet to be interpreted or enforced. It is likely that in the
future many new laws will take effect that will regulate the Internet and the
markets in which the Company operates. The applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation and tariffs, libel, consumer protection,
obscenity, pricing and personal privacy is uncertain. Current and future laws
and regulations may:

     o    Decrease the growth of the Internet;
     o    Regulate Intellicom's customers in ways that harm its ability to sell
          services to them;
     o    Decrease demand for its services; and
     o    Impose taxes or other costly requirements or otherwise increase the
          cost of doing business.

Thus, the adoption and interpretation of any future or existing regulations
could seriously harm Intellicom's business.

The Legal Environment in which Intellicom Operates is Uncertain and Claims
Against Intellicom and other Legal Uncertainties could cause its Business to
Suffer

Because most of Intellicom's business is conducted outside the U.S., Intellicom
is susceptible to the governmental regulations and legal uncertainties of
foreign countries. In general, the laws of countries outside the U.S. governing
the Internet and Internet services, to the extent they exist at all, vary
widely, are unclear, in flux, and have failed to keep pace with the rapid
advancements in Internet technology and the expanding range of Internet-based
services being offered. Partly because of these problems, and Intellicom's view
that local regulatory compliance is a greater issue of concern for its ISP
customers, Intellicom has not, and currently does not intend to, determine
conclusively whether it complies with the requirements of any particular foreign
country.

Any one or more of the countries where Intellicom conducts business may require
that Intellicom qualifies to do business in that particular country, is liable
for certain taxes or tariffs, is otherwise subject to regulation or is
prohibited from conducting its business in that foreign country. Thus,
Intellicom cannot assure that it is currently in compliance with the legal
requirements of any particular country or all of the countries outside the U.S.
in which it conducts business, that Intellicom will be able to comply with any
such requirements or that the requirements will not change in a way that would
render the receipt of its services in a particular country illegal. Intellicom's
failure to comply with foreign laws and regulations could cause it to lose
customers, restrict it from entering profitable markets and seriously harm its
business. Intellicom's customers also face many of the governmental and legal
uncertainties that Intellicom faces and


                                     - 27 -

<PAGE>


currently are, or in the future may become, subject to many of the same
requirements to which Intellicom may be subject. Intellicom makes no effort to
determine whether its customers comply with applicable regulations. The failure
of Intellicom's customers to comply with applicable laws and regulations could
cause it to lose customers or otherwise seriously harm its business.

                                ISP Channel Risks

The Company may face Unexpected Liabilities in Winding Down the Business of ISP
Channel

The Company has determined that it is in the best interests of the Company and
its shareholders to wind down the business of ISP Channel. While the process of
winding down ISP Channel was substantially completed by June 30, 2001, there can
be no assurances that all claims and issues have been resolved. There may be
additional costs related to terminating cable affiliate and other contracts,
reducing the workforce and recovering and disposing of deployed assets. In
addition, the Company may face litigation from customers, cable affiliates and
others with respect to such winding down activities.

                                  Aerzone Risks

The Company may face Unexpected Liabilities in Winding Down the Business of
Aerzone

The Company has determined that it is in the best interests of the Company and
its shareholders to wind down the business of Aerzone. While substantial
progress has been made in the process of winding down Aerzone, some issues,
including the proposed sale of the Laptop Lane business remain. The Company
expects to incur costs related to terminating airport and other contracts,
reducing the workforce and recovering and disposing of deployed assets. In
addition, the Company may face litigation with respect to such winding down
activities.

Further, the Company may be unsuccessful in its efforts to sell the Laptop Lane
business. There can be no assurance that a buyer will be found at an acceptable
price or that the business can be sold for any particular amount of cash,
securities or other consideration.

                                     - 28 -

<PAGE>

 Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits

     Exhibit No.             Description of Document
     ----------              -----------------------



             3.1   Amended and Restated Certificate of Incorporation of the
                   Registrant. Incorporated by reference to the Company's
                   Quarterly Report on Form 10-Q for the quarter ended June 30,
                   1999.

             3.2   By-Laws of the Company. Incorporated by reference to the
                   Company's Registration Statement on Form S-3/A dated April
                   22, 1999.

(b)  Reports on Form 8-K:

    Current report on Form 8-K filed with the Commission on April 10, 2001.

    Current report on Form 8-K filed with the Commission on May 2, 2001.

    Current report on Form 8-K filed with the Commission on May 29, 2001



                                     - 29 -

<PAGE>

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SOFTNET SYSTEMS, INC.



/s/ George L. Hernandez                                Date:  August 7, 2001
----------------------------------                            --------------
George L. Hernandez
Acting Chief Operating Officer; Vice President,
Finance and Administration; and Secretary



/s/ Edward A. Bennett                                  Date:  August 7, 2001
----------------------------------                            --------------
Edward A. Bennett
Acting Chairman of the
Board of Directors


                                     - 30 -